Cablegate: Taiwan's Cash Cards

This record is a partial extract of the original cable. The full text of the original cable is not available.

140024Z Oct 05

UNCLAS SECTION 01 OF 02 TAIPEI 004178

SIPDIS

STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/TC, EAP/EP

USTR FOR WINTER AND WINELAND

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/LMOGHTADER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

SENSITIVE

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taiwan's Cash Cards

SUMMARY
-------

1. Cash card debt write-offs by Taiwan banks have increased
sharply since June of this year mainly due to card-issuing
banks trying hard to live up to a new, stricter non-
performing loan (NPL) definition. Some observers worry that
the sharp increase in cash card cancellations could create a
credit crunch that could dampen Taiwan's private consumption
and economic growth. Meanwhile, the value of loans to cash
card accounts continues to grow rapidly. END SUMMARY.

What are Cash Cards?
--------------------

2. In addition to credit and debit cards, many Taiwan banks
offer "cash card" arrangements under which consumers borrow
money from the bank at an interest rate much lower than that
offered on credit cards and agree to make set monthly
payments to the bank to repay the loan. The cash card
provides access to the borrowed money at ATMs and at most
places that accept credit cards. For Cosmos Bank Taiwan,
the largest issuer with a 25 percent market share, the cash
card business contributes over 60 percent of the bank's net
profits. However, a recent Fitch ratings report indicated
that many Taiwan cash and credit card lenders are losing
money because of their high operating costs, small client
base, and poor risk management.

New Definition for NPL
----------------------

3. In July this year, Taiwan's Financial Supervisory
Commission (FSC) adopted a new policy that defines NPLs as
loans overdue three months or more. Prior to July 1, a loan
was non-performing if no principal or interest payments had
been made for six months.

Sharp Increase in Write-offs
-----------------------------

4. The change in the NPL definition, together with strong
FSC pressure on banks to keep their NPL ratio below three
percent, has forced cash-card issuers to write off large
amounts of bad debt beginning mid-2005. Write-offs in May
2005 posted a moderate growth of 4% from a year ago to
NT$877 million. The growth in subsequent months shot up to
189% in June, 112% in July, and 210% in August.

5. Under the old NPL definition, no cash-card issuers
posted cash card NPL ratios above the FSC-set 3% limit in
June 2005. However, after the change in overdue policy,
five banks were penalized for crossing the 3% limit in July.
In August, the number of banks violating the 3% NPL ratio
limit declined to three.

Credit Crunch?
--------------

6. In recent reports, foreign financial analysts have
expressed concern that the new FSC policy could contribute
to banks being less willing to offer consumer credit and
that, in turn, could dampen private consumption and economic
growth. The "Financial Times" recently reported that the
lack of credit growth "is pushing" Taiwan into a credit
crunch of the sort suffered by South Korea in 2002-3.

7. In spite of the Financial Times article, most local
observers believe the background of South Korea's 2002-3
credit crises was much different from Taiwan's current
situation. By writing-off bad debt, Taiwan banks have been
able to continue to expand their cash-card services.
Revolving balances of cash-card accounts grew 53.5% in July
and 50.3% in August.

8. Our FSC contact told AIT that the rapid growth of cash
card accounts reflected the handsome profits originating
from cash card services, and that the large volume of write-
offs represented Taiwan banks' sufficient profitability to
deal with bad debts. The FSC contact stressed that
outstanding loans offered by banks to cash card holders
remained relatively small and unlikely to seriously impact
overall spending. He noted that cumulative lending to cash
card holders as of August 2005 was only NT$312 billion, less
than two percent of total bank loans (NT$16.5 trillion).

PAAL

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